What is Title Insurance?
Title insurance plays a key role in our financial system and economy by providing peace of mind to both purchasers of real property and lenders who finance these purchases. Unlike other types of insurance that insure against loss from future events, title insurance covers the insured from losses due to past events. The title company defends attacks on the title and reimburses covered losses in an amount up to the policy limit.
Consider how freely we transfer real property in this country and allow property owners to access the equity in their property through refinance transactions in both the residential and commercial worlds. Title insurance policies provide peace of mind to the insured parties, which reduces the risks in such transactions, which in turn reduces the costs of lending money.
Like all other types of insurance in Texas, title insurance is regulated by the Texas Department of Insurance (TDI). There are two main types of title insurance policies in Texas, an owner’s policy and a lender’s policy. Nearly every institutional lender will require a lender policy, Texas form T-2, to provide coverage on a transaction where they are lending money. An owner’s policy, Texas form T-1 or T-1R, is generally not required, but a purchaser is likely to want coverage for many of the same reasons that a lender does, to protect their substantial financial investment.
What does Title Insurance cover?
The TDI promulgates all the forms that can be used for the issuance of title insurance. There are a variety of endorsements which can be added to certain policies. Here is a list from TDI of some of the more common covered title defects:
Invalid documents due to forgery, fraud, undue influence, duress, incompetency, incapacity, or impersonation.
Failure of any person or entity to have authorized a transfer or conveyance.
A document affecting title that is not properly executed, signed, witnessed, notarized, or delivered.
Undisclosed or unrecorded easements not otherwise apparent on your land.
No right of access to and from the land.
A document executed under a falsified, expired, or otherwise invalid power of attorney.
A document not properly filed, recorded, or indexed in the public records.
Ownership claims by undisclosed or missing heirs.
Defect arising from an improper prior foreclosure.
Undisclosed restrictive covenants affecting your property.
Any statutory or constitutional contractor’s, mechanic’s, or materialman’s lien for labor or materials that began on or before the policy date.
Lien for labor or materials furnished by a contractor without your consent.
A previous owner failed to pay:
A mortgage or deed of trust
A judgment, tax, or special assessment
A charge by a homeowners or condominium association.
Other liens or claims that may exist against your title that are not listed in the policy.
What it not covered?
Not every issue will be covered by a title insurance policy. The title company issuing the policy will add certain exceptions to Schedule B regarding known defects. For example, a recorded easement depicted on a survey that runs across the back of the property. In addition to the added exceptions to coverage, here is TDI’s list of common items that are NOT covered:
Defects that are created after the policy is issued.
Defects that you create, or of which you had knowledge.
Problems that arise because of your failure to pay your mortgage, or to obey applicable laws or restrictive covenants that were disclosed to you.
Certain taxes and assessments.
Losses resulting from rights claimed by someone else occupying the land. The title company may need to inspect the property. There may be a charge for the inspection.
Homestead, community property, or survivorship rights of a policyholder’s spouse. Texas homestead laws address the rights of a spouse or survivors of a property owner.
Claims from other people who may have certain rights if your property is near a body of water or has a river or stream flowing through it.
Condemned land, unless a condemnation notice appeared in the public record on the policy date or the condemnation occurred before the policy date.
Violations of building and zoning ordinances and other laws and regulations related to land use, land improvements, land division, and environmental protection.
Disclosed restrictive covenants limiting how you may use the property. Request copies of restrictions and have your attorney explain them.
How do I get title insurance?
In Texas, most real estate transactions take place under the guidance of a TDI licensed escrow officer for a title company. In most cases the title insurance company is listed in the contract between a buyer and a seller of real property. Once the contract is fully executed, it is delivered to the escrow officer who immediately begins guiding the parties towards closing. In many residential transactions the real estate agents choose the title insurance company that they are comfortable with using. In other transactions lenders or attorneys may also direct a transaction to the title insurance company they prefer. However, the parties to the transaction are paying for the policy and the associated fees, so they are entitled to have the final say in what title insurance company they wish to use.
Who provides title insurance?
All title insurance policies are underwritten by a TDI licensed underwriter. Many of these underwriters have direct offices where they will handle the transaction for you. There are also independent title insurance companies who have their own offices and escrow officers, and they write policies on behalf of one or more underwriters. A normal consumer may not notice much difference between a direct office and an agent. However, one of the key distinctions is that most direct offices are required by their parent company to write their policies on the single underwriter which owns them. An agent who has multiple underwriters has the ability to shop a file to other underwriters, if a certain aspect of the file does not meet one that underwriter’s guidelines. Essentially an independent company with multiple underwriters will have the ability to get more files closed, because they have more options.
Texas also allows for fee attorneys to sell title insurance and close transactions. A fee attorney is affiliated with either a direct or independent title insurance company and they close real estate transactions in their office. Some employ licensed escrow officers and have store fronts that very much resemble a traditional title insurance office. Please click here to learn more about our affiliated fee attorney office where we send transactions.
How much does it cost?
Just like the TDI promulgated forms, the policy and endorsement rates are also set by the Texas Department of Insurance. No provider of title insurance is allowed to discount rates or rebate premium back to a consumer. Here is an example of what the basic premium rates would be based upon some different sales prices:
Policy Value // Basic Premium (not including endorsements)
$250,000 // $1,623 $500,000 // $2,940 $1,000,000 // $5,575 $5,000,000 // $22,895 $25,000,000 // $83,995
While the policy, endorsement, and certain fees are all the same no matter which title company you close with, there are some fees that vary. These are the settlement charges and items that you purchase from the title insurance company. These fees may include a settlement or escrow fee, currier fee, tax certificate fee, copy fee, document fee, e-recording fee. These fees can vary from company to company.
Understanding my title commitment
Title commitments are provided to the parties to a transaction after the order is received by the title company. Depending on many factors including necessity and property type, the commitment may be delivered anywhere between zero and thirty days after the order is opened.
For a typical residential transaction the commitment will be delivered within a week, while a commercial transaction tends to average ten to fourteen days.
While a title company’s delivery time may vary significantly, the end product will be very similar as each company has to follow the TDI guidelines and promulgated forms for the title commitment. This commitment is key to the transaction as it will show important information for a buyer or borrower, seller, and lender. The commitment is divided into four sections:
Schedule A includes the insured parties, the policy amounts, who is vested in title, and the legal description of the land that is being insured. Vesting is important as whoever is shown in title will have to sign any documents to convey or refinance the property. Note that the title company determines vesting from an examination of the public record, and this is not determined through the tax appraisal district.
Schedule B lists all the exceptions to coverage that will be noted on the title policies. Paragraph 1 will list the restrictive covenants that affect the property. On most commitments these restrictions will be in bold font, and further down you will see more bold font that includes the particular exceptions for the subject property. Some of these common exceptions include easements, issues noted on the survey (building and property line issues), and any potential rights of tenants or other parties in possession of the property. There is also a standard mineral exception that is included which means that the title company is not going to insure the mineral estate. Some of these exceptions can be removed either by request or by working with the title company, while others cannot be removed.
Schedule C will show what needs to be completed before the title company can close the transaction and issue a policy. Liens that affect the property, issues with who is vested in title, judgments against the owner, and specific requirements to any party are all items that would appear on Schedule C. The escrow officer will work with the parties to help get the information necessary to clear these items.
Schedule D is probably the least reviewed and least important portion of the commitment. It lists the owners and directors of the title insurance company, the underwriter, and anyone receiving a portion of the collected policy funds.
It is very important for anyone who is buying, selling, or refinancing real property to understand and/or work with people who can help them understand this information. A good escrow officer is able to explain a commitment to the parties in an informative, but neutral manner. Our affiliate’s escrow team is well trained to guide clients to the smoothest closing. Further, a party may want to consider hiring competent counsel if they have questions or concerns about any of these items. This is particularly true on commercial transactions where competent counsel can save a party both time, money, and stress.